Broken Healthcare: Investing in Solutions

April 24, 2019 | Identifying Investment Value Amid Solutions to Our Broken System


The cost of healthcare in the United States has received a great deal of attention recently, and lowering the cost of care has become a political rallying cry for both Republicans and Democrats. The attention is warranted—the United States spends more on healthcare as a percent of GDP than any other nation, and our country’s demographics dictate that our healthcare needs are only going to grow.

As these factors converge and pressure grows on our healthcare infrastructure, it will require massive changes to the current healthcare system. In our view, these changes will create opportunities for educated investors both to realize profits and to avoid losses.

From Wall Street to Washington, there is little disagreement over the urgent need for change. Given the potential impact on equity markets and America’s future competitiveness, healthcare industry stakeholders—and policymakers in Washington—are facing broad and deep implications for how they address these challenges.


Until the 1980s, healthcare spending in the U.S. was roughly on par with the rest of the world. However, the decade that saw the introduction of Prozac and widespread use of MRI machines also saw Americans increasingly opening our wallets for healthcare. In the decades since, an unhealthy distance has grown between the U.S. and the rest of the world, both in healthcare expenditures in absolute terms and as a percent of GDP.

By 2017, 17.3% of U.S. GDP was devoted to healthcare, compared to 10.6% for other developed countries. An average of $10,224 per person is now spent on healthcare in the U.S. The next highest spender, Switzerland, spends 28% less than the United States (see Chart 1 below).

According to Commonwealth Fund research in 2018, the key areas where the U.S. spends more than peer countries are:

  • • Doctors – The average salary for a general practitioner in the U.S. is $218,173, nearly double the average salary across all high-income countries. Specialists and nurses in the U.S. also earn significantly more than elsewhere.
  • • Pharmaceuticals – The U.S. spends $1,443 per person on pharmaceuticals, compared to the average of $749 in other developed countries.
  • • Healthcare administration – The U.S. spends 8% of total national health expenditures on activities related to planning, regulating, and managing health systems and services, compared to an average 3% spent among all high-income countries.

Perhaps worst of all is that this incremental spend has not produced better health outcomes (see Chart 2 on the next page). According to a Commonwealth Fund analysis done in 2017, when compared to 10 other high-income countries across 72 indicators, the U.S. places last in health system performance. Life expectancy, after improving for several decades, worsened in recent years for some populations, aggravated by suicides and the opioid crisis. In addition, as the baby boom population ages, more people in the U.S.—and all over the world—are living with age-related disabilities and chronic disease, placing pressure on health care systems to respond.

Timely and accessible health care could mitigate many of these challenges, but the U.S. healthcare system falls short, failing to deliver indicated services reliably to all who could benefit. In particular, poor access to primary care has contributed to inadequate prevention and management of chronic diseases, delayed diagnoses, incomplete adherence to treatments, wasteful overuse of drugs and technologies, and coordination and safety problems.

In addition to the cost/quality analysis, our population is both getting older and living longer. These factors will continue to put upward pressure on healthcare-per-capita costs. The combination of demographics and our already inflated cost structure creates an urgent need for change. In the private sector, large corporations are investing billions to take control of both the economics of healthcare and improved health outcomes. At the Federal and State Government levels, various solutions have been proposed and the issue will no doubt find center stage in 2020 elections, but there are competing interests and effectiveness is unproven.

What is clear is that there is a near-universal sentiment that domestic healthcare needs to be more affordable and more effective. In the next sections, we will look across the public and private sectors to examine how change is being proposed and pursued.


Employer-provided health insurance is still the dominant form of healthcare provision in the U.S. According to the 2017 United States Census Bureau Healthcare Report, 62.2% of Americans have employer-provided healthcare and 37.7% is government-provided, mostly by Medicare and Medicaid. The rest are either self or uninsured.

It’s clear that much of the financial burden of delivering healthcare squarely on the shoulders of American corporations—from 2007-2016, the amount of money U.S. companies spent on healthcare rose +44%. The aggregate spend for corporations is greater than what the Pentagon spends on defense each year. Some of the country’s largest corporations such as Walmart, Berkshire Hathaway, JP Morgan and Amazon (the latter 3 have a joint venture called Haven) have taken this crisis into their own hands and have invested heavily to create better and more cost-effective health outcomes for their employees and customers. The financial benefits to these companies and U.S. customers are twofold:

  • Cost containment: In buying healthcare directly from the providers, both the provider and employer can reduce or eliminate the middleman’s frictional cost.
  • Health value creation: Healthy employees who work with better and healthier energy create economic value for their employers.

Walmart has taken a unique approach to this issue by developing a value-based, direct- to-provider program. The organization currently buys healthcare directly for their 1mm+ employees and offers a Centers of Excellence program for high-cost treatments that have significant variability in diagnoses and outcomes. According to the Harvard Business Re- view’s “How Employers are Fixing Healthcare” report, Walmart’s decision to pay for their employees to see to the best providers possible—and to receive the best prevention and treatment available—has saved the organization and its employees tens of millions of dollars with significantly better health outcomes. It’s early days, but so far this approach has created a win-win solution.

Haven, which is Berkshire Hathaway, JP Morgen and Amazon’s joint venture, was formed out of frustration with increases in employer healthcare costs without any corresponding improvement in overall health outcomes for their respective employees. One of the key factors was the high administrative costs associated with the services. “There are a lot of middlemen in the system, and there have to be solutions that simplify that, take some of the middlemen out of the system,” said Atul Gawande, the Harvard surgeon and journalist who was named to run the initiative. “Health insurers, pharmacy bene ts managers and distributors are [at] the top of that list.” Haven is still building-out the exact method of execution, but their ideas are seen by some (mostly the middlemen) as a real threat to our healthcare system. Haven’s very existence appears to have reignited the dialogue in Washington.

While Walmart and Haven’s approaches differ, both of their efforts are focused on three key improvements:

  • Eliminating the frictional costs created by middlemen
  • Increasing the amount of data and remote monitoring related to chronic disease; and,
  • Enhancing the patient experience by increasing frequency of visits and increasing the use of specialists.


In 1970, major health programs made up only 5% of the overall government spending budget. That share increased to 20% by 2000 and 28% by 2017. By 2028, one-third of federal dollars not spent on interest will go toward health spending, and by 2040, nearly 40% is projected. According to the Committee for a Responsible Federal Budget, the U.S. spends more on healthcare than any other country of similar economic size and the increasing budget numbers may prove to be unsustainable over time. It is also important to understand that these estimates do not account for the erosion of the tax base resulting from the tax exclusion for employer-sponsored health insurance.

Surprisingly, addressing the healthcare crisis is one of the few issues that Republicans and Democrats agree is of paramount importance. Solutions for how to address the problem, however, expose the wide political gulf that makes any grand resolution seem fleeting. As we step into a new presidential election cycle, expect there to be a constant ow of headlines about the cost of healthcare, who is responsible, and what the candidates are going to do to x the problem. is will be an ongoing investment negative for any company that bene ts from the current system and is not a part of the solution.


According to the American Journal of Medicine and as outlined above, there are a number of ways to reduce healthcare costs:

  • Reduce administrative costs associated with health services
  • Promote preventative care and wellness programs (nutrition, exercise/movement, stress management, sleep, etc.)
  • Eliminate unnecessary tests and procedures; and, • Control the costs of prescription drugs

It is our job as investment managers to anticipate long-term trends—to ensure we invest with the tailwinds and to avoid the headwinds. The conflict of interest that exists when a healthcare provider prescribes the most pro table treatment—instead of the most effective one—is increasingly being exposed. e world’s largest employers are not going to keep paying for unnecessary treatments and sub-standard health outcomes, and it is clear that administrative sub-sectors like insurers, distributors, pharmacy bene ts managers, and even drug companies are going to face pricing and regulatory pressure in the foreseeable future.

As the political process grinds ahead, the engine of technological innovation is likely to also continue full steam ahead. Investment dollars will continue to flow to technologies aimed at improving outcomes, reducing administrative friction, and increasing the scalability of healthcare delivery. Additionally, as we migrate toward a world of increased data collection and monitoring, distributed healthcare (urgent care facilities, in-home health)— and the companies that provide these services—are also likely to thrive.

We hope you found this analysis insightful and useful, and we look forward to addressing this topic and its impact on your investments at your convenience. In the meantime, if you have any questions or would like to discuss this topic in more detail, please do not hesitate to reach out to us.

The opinions expressed herein are strictly those of Ashfield Capital Partners, LLC (“Ash eld”) and are subject to change without notice. While Ashfield believes all the information is from reliable sources, no representation or warranty, can be made with respect to its completeness. Any projections, market outlooks or estimates in this presentation are forward-looking statements and are based upon internal analysis and certain assumptions, which reject the views of the Ash eld and should not be construed to be indicative of actual events which will occur. As such, the information may change in the future should any of the economic or market conditions used by Ashfield to formulate assumptions contained within this letter. e information provided does not constitute legal, financial or tax advice.